Fourace IPO: Over 30 Years of Expertise Electrifies Its Business

Fourace IPO: Attractive Margins, Positive Cash Generation, and a Strategic Business Plan

Equity Analyst, LightStream Research

Aqila Ali

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

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Equity Capital Markets

Fourace Industries / Equity Capital Markets

In our earlier reports, we covered <a href="https://www.smartkarma.com/entities/fourace-industries" target="_blank" data-smartkarma-citation="entities:28264:1" rel="noopener">Fourace Industries (FOUR HK)</a>’s background, its business model, growth prospects, the risks it faces in the market, and its financial performance. We concluded that the company’s 30 years of expertise in the business, along with its attractive margins and strategic business plans, make it an attractive business. Customer concentration risk is still our main concern, but as we mentioned, the company’s move to OBM business should negate such concerns.  Fourace revealed that it aims to raise around HKD91.7m or more, offering 312.5 million shares at a price range of HKD 0.4- HKD0.6 per share. This insight covers Fourace’s valuation in relation to its peers. Our views are:<ul>
<li>Most of the peers are still private companies.</li>
<li>We selected a range of companies (OEM/ODMs as well as OBM) that cater to similar products to Fourace and serve similar markets (Japan, US, Europe, China).</li>
<li>Based on double-digit revenue growth (27%) and OPM (17%), the company is likely to trade at an FY2 EV/EBIT and a PE of 8.4x and 16.2x respectively at the high end of the IPO price range. At these multiples, Fourace appears fairly valued in comparison to selected peers.</li>
<li>Fourace also has better fundamentals than its peers and thus, we feel it deserves a slight premium to certain peers.</li>
<li>Moreover, as earnings improve, which is likely as the OBM model is adopted, the company could trade at a higher multiple similar to OBM peers.</li>
</ul>Deal Specifics of Fourace’s Offering<table class="table table-striped"><tbody>
<tr><td colspan="2" style="width: 100.0%;">Details:</td></tr>
<tr>
<td style="width: 33.08%;">Price Determination Date</td>
<td style="width: 66.92%;">September 4th, 2020</td>
</tr>
<tr>
<td style="width: 33.08%;">Announcement of Final Offer Price</td>
<td style="width: 66.92%;">September 14th 2020</td>
</tr>
<tr>
<td style="width: 33.08%;">Expected IPO price per share:  </td>
<td style="width: 66.92%;">Between HKD0.4 and HKD0.6</td>
</tr>
<tr>
<td style="width: 33.08%;">Number of Shares for IPO:</td>
<td style="width: 66.92%;">312,500,000 Shares</td>
</tr>
<tr>
<td style="width: 33.08%;">No. of International Placing Shares</td>
<td style="width: 66.92%;">
 
281,250,000 Shares
</td>
</tr>
<tr>
<td style="width: 33.08%;">No. of HK Offer Shares</td>
<td style="width: 66.92%;"> 31,250,000 Shares</td>
</tr>
<tr>
<td style="width: 33.08%;">IPO base deal size: </td>
<td style="width: 66.92%;">Approx. HKD 91.7m</td>
</tr>
<tr>
<td style="width: 33.08%;">Expected market cap after IPO:</td>
<td style="width: 66.92%;">Between HKD 500m – HKD 750 m</td>
</tr>
<tr>
<td style="width: 33.08%;">Use of Proceeds</td>
<td style="width: 66.92%;">
* HKD49.9m (54.5%) – Expanding and upgrading facilities;
* HKD 22.7m (24.8%) – Research and development;
* HKD 11.9m (11.9%) – Introduction of new products under its own “IHA” brand;
* HKD 3.2m (3.5%) – Sales and marketing;
* HKD 4m (4.3%) – Upgrading IT systems and Design-aided software
</td>
</tr>
</tbody></table>Source: Company Disclosures

In our earlier reports, we covered Fourace Industries (FOUR HK)’s background, its business model, growth prospects, the risks it faces in the market, and its financial performance. We concluded that the company’s 30 years of expertise in the business, along with its attractive margins and strategic business plans, make it an attractive business. Customer concentration risk is still our main concern, but as we mentioned, the company’s move to OBM business should negate such concerns.  Fourace revealed that it aims to raise around HKD91.7m or more, offering 312.5 million shares at a price range of HKD 0.4- HKD0.6 per share. This insight covers Fourace’s valuation in relation to its peers. Our views are:
Most of the peers are still private companies.
We selected a range of companies (OEM/ODMs as well as OBM) that cater to similar products to Fourace and serve similar markets (Japan, US, Europe, China).
Based on double-digit revenue growth (27%) and OPM (17%), the company is likely to trade at an FY2 EV/EBIT and a PE of 8.4x and 16.2x respectively at the high end of the IPO price range. At these multiples, Fourace appears fairly valued in comparison to selected peers.
Fourace also has better fundamentals than its peers and thus, we feel it deserves a slight premium to certain peers.
Moreover, as earnings improve, which is likely as the OBM model is adopted, the company could trade at a higher multiple similar to OBM peers.
Deal Specifics of Fourace’s Offering
Details:

Price Determination Date
September 4th, 2020


Announcement of Final Offer Price
September 14th 2020


Expected IPO price per share:  
Between HKD0.4 and HKD0.6


Number of Shares for IPO:
312,500,000 Shares


No. of International Placing Shares

 
281,250,000 Shares



No. of HK Offer Shares
 31,250,000 Shares


IPO base deal size: 
Approx. HKD 91.7m


Expected market cap after IPO:
Between HKD 500m – HKD 750 m


Use of Proceeds

* HKD49.9m (54.5%) – Expanding and upgrading facilities;
* HKD 22.7m (24.8%) – Research and development;
* HKD 11.9m (11.9%) – Introduction of new products under its own “IHA” brand;
* HKD 3.2m (3.5%) – Sales and marketing;
* HKD 4m (4.3%) – Upgrading IT systems and Design-aided software


Source: Company Disclosures

Fourace IPO (Valuation): Attractive Earnings Profile and Valuation Relative to Peers